EUR/USD: It's ECB day again, options market don't expect violence on the topside

EUR/USD is heading into the European Central Bank rate decision on a positive note. The currency pair is reporting nearly a 1% week-to-date gain at press time and has recently charted a bullish breakout. Options market, however, doesn't see a sustained move higher. 

ECB to maintain status quo

The European Central Bank is widely expected to keep policy on hold Thursday, as the impact of recent measures unfolds and the pace of the economic recovery remains uncertain, according to Reuters. 

Besides, the true extent of the economic damage caused by the coronavirus outbreak in the second quarter would become clear only at the end of the month with the first estimates for GDP growth. As such, there is little reason for further action from the European Central Bank (ECB) at the current juncture. 

Some analysts think the European Union (EU) meeting, due on Friday-Saturday, could have a bigger impact on the single currency. The member nations stand divided on the scale and composition of the stimulus package, with the richer northern nations like Germany and the Netherlands unwilling to take the long-term step of polling debt with the fiscally-profligate Mediterranean governments. 

Analysts at Reuters think the recent strength in the EUR is a sign that investors are expecting member nations to reach a compromise close to Germany and France's proposal of a 750-billion euro fund, which will deliver 500 billion euros as grants and guarantees and 250 billion in loans. "A deal close to this plan could see a knee jerk EUR/USD test of the 1.1495 2020 high from March," Reuters analysts noted. 

However, the options market doesn't expect violence on the top side. Implied volatilities or “vols” of one-month euro/dollar options (EUR1MO) fell from 8.12% to 6.63% in the three weeks to July 3 and has been sidelined below 7% ever since. 

If the options market expected that the shared currency is going to chart a big move on the higher side, then volatility prices would have been higher. One-month risk reversals, used to gauge bullish or bearish sentiment in currency markets, are also sidelined near 0%, a sign of neutral bias. 

Technical levels